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Published: Fri, 02 Feb 2018

Conflict Of Laws In International Commercial Arbitration

One of the obligations of the parties when choosing arbitration as a way of resolving any future disputes that may arise is to choose the law that will govern the contract. Based on the freedom of contract and the party autonomy, the parties are free to choose the law that will govern their contract. That has to be an express choice, though.

Sometimes the parties for various reasons do not choose the proper law of the contract, such indicative reasons might be that they forget or think that making a choice of law is not important. If they do not expressly choose the governing law, the arbitrators are now obliged to choose the law of the contract for the parties. Firstly, they must make sure that there is no implied choice of law. In case there is, that implied choice will be the governing law. Otherwise, the arbitrators shall have to choose the law they think is the appropriate one. They are free to choose every law they like, either a national law or a more delocalized one, based on an international convention. There are, however, some restrictions to that freedom. It has to be a law that is closely connected to the parties, meaning that would have been the choice of the parties if they had made an express choice of the applicable law of the contract.

Express or implied choice of law

To begin with, one main principle of the arbitration is party autonomy, which originates from the freedom of contract. Parties are free to choose the proper law to govern the contract [1] . Any express choice of law is binding to the arbitrators.

This freedom can be found in numerous Rules [2] and has been embodied in numerous jurisdictions, like the English Arbitration Act 1996 [3] in which “The arbitral tribunal shall decide the dispute in accordance with the law chosen by the parties as applicable to the substance of the dispute.” Furthermore, this principle has been acknowledged in a lot of cases. As we can see in the Vita Food Products Inc. v. Unus Shipping Co. Ltd case [4] , it is made clear that parties are the ones to choose the proper law. In the James Miller v Whitworth Street Estates case [5] , Lord Reid stated that “Parties are entitled to agree what is to be the proper law of their contract, and if they do not make any such agreement then the law will determine what is the proper law. (…)But it must be a contractual agreement. It need not be in express words. Like any other agreement it may be inferred from reading their contract as a whole in light of relevant circumstances known to both parties when they made their contract”. The question, thus, is not what the parties thought or intended but what they agreed.

However, this total freedom has been subject to a lot of criticism. For example, Professor Atiyah was not in favour of the contract theory and stated [6] that “in the modern world, where many people see the functions of Government and Parliament as virtually limitless, it is absurd to think of society as regulated by freedom of contract subject only to limited instances of State ‘interference’”.

Moreover, England has had a negative attitude towards this principle [7] . This is quite logical, though, if we consider the reasons why the parties are choosing the law of a certain country and that is because they base their choice on completely different criteria than they should have.

For example, their criterion could be that they know this legal system better than others, that this system might have a better reputation than others, that the country is relevant to their transaction or even that that country is neutral [8] . At the same time the New York Convention restricts this autonomy by having it subject to public policy and mandatory rules. [9]

However, if by any chance the parties have not made an express choice of the law governing the contract, then the arbitrators shall have to look whether there is an implied choice of law. In which case the arbitration agreement will be governed by the law impliedly chosen by the parties [10] . The Rome Convention [11] states also that the choice should be demonstrated with reasonable certainty by the terms of the contract or the circumstances of the case.

Moreover, when no express choice of law has been made, the arbitrators can choose the law that was the choice of the forum by the parties. That can only be an option, though, if the parties have chosen the law of a country that will litigate their disputes. Basically, we can assume that the parties, by making that choice, wanted for the law of that country to be the substantive law of the contract [12] .However, as previously mentioned, the forum of an arbitration is, usually, chosen for completely unrelated to the arbitration reasons. Still, as long as there is a reference by the parties, the arbitrators will have to take it into consideration

Absence of choice of law

What happens, though, when there has been made no express or implied choice of law by the parties? The arbitrators will have to determine the conflict of law rules which are applicable and, then, they will apply those rules to decide which law should apply to this contract [13] .They are free to choose any law they consider proper, but they must bear in mind that that law would be a law the parties would have chosen, if they were to make a choice [14] .The choice of the proper law will be either a national law, a lex fori or a set of rules, in general, a delocalized approach.

a) A lex fori approach

One approach for the arbitrators is to choose the lex fori as the proper law of the contract. Traditionally, the arbitrators would apply the conflict of law rules of the Lex Arbitri, the law of the place, ‘seat’ of arbitration. The Lex Arbitri is a national law, a set of general principles and as an English judge in the Smith Ltd v H International [15] stated it is “a body of rules which sets a standard external to the arbitration agreement and the wishes of the parties, for the conduct of the arbitration”.

Every country has each own national law and usually the parties and the arbitrators will choose the Lex Fori, instead of a more delocalized approach [16] . English courts consider really essential for an arbitration to have a ‘seat’ [17] and have been against the idea of delocalization theory [18] , as we can see in the Minmetals [19] case, for example. There Justice Colman ruled that “in international commercial arbitration, a party who agreed to have their disputes arbitrated in a foreign jurisdiction was bound not only by the local arbitration procedure but also by the supervisory jurisdiction of the courts of the seat of the arbitration”.

On the contrary, though, French and American courts have minimized the influence of the law of the place of arbitration [20] .Paulsson [21] , taking into consideration a French case [22] , states that ‘an international arbitral award may be enforced even if not subject by the lex loci arbitri to the same appeal procedures as a domestic award’.

Moreover (in addition), an international arbitration, as assumed from the Sapphire [23] case, should not have a lex fori, because it is ‘universal’. The arbitrator should not apply the law of the seat, but he should look at all the conflict rules and apply the one with the closest connection to the parties.

However, the Rome Convention [24] gave a different perspective to this theory and stated that the tribunal should look for the country most closely connected. That can be easily understood because of the political and social conditions of a country which are not static and can always affect the terms of a contract. Plus, the choice of the arbitral seat by the parties could have been made for completely irrelevant reasons. So, the arbitrator must identify and weight up the various national characteristics of the contract, the nationality of the parties, the place where the contract was made, the place or places where it was to be performed, the language and terminology of the contract and so on [25] .He should try to choose the law of the country most closely connected, but at the same time that country should be as neutral as possible and the national law of one of the parties, for example.

b) A delocalized approach

On the other hand, the arbitral tribunal can choose the governing law upon international conventions. That would be a more delocalized approach, not referring to a national law in particular. This theory refers to a universal lex arbitri [26] .Basically, applying this theory means than an international arbitration will not be subject to any peculiarities of law just because of the seat of the arbitration. The ratio of this theory is to assist in the creation a truly international law of arbitration procedure without domestic law interference [27] . There are numerous international model laws and rules, like the UNCITRAL, the ICC and the AAA, who are focusing on this idea and set relevant rules. The UNCITRAL Model Law in particular, was established to harmonise the international trade law and, as a matter of fact was intended to provide a model which would lead to greater uniformity [28] . In fact, the UNCITRAL Rules [29] state that in absence of an express choice of law, the tribunal shall apply ‘the law determined by the conflict of laws rules which it considers applicable’.

The Model Law refers to the same option [30] In the ICC Rules [31] the tribunal can ‘apply the rules of law, which it determines to be appropriate’. Other conventions leave the choice to the arbitral tribunal. The European Convention, for example, states that ‘the arbitrators shall apply the proper law under the rules of conflict that the arbitrators deem applicable’ [32] .Moreover, the French Code of Civil Procedure provides that ‘The arbitrator shall settle the dispute in accordance with the rules which the parties have chosen, and in the absence of such a choice, in accordance with those rules which he considers to be appropriate’ [33]

One of the most important systems of delocalization is Lex Mercatoria. It was used as a body of rules in the medieval times by merchants [34] .Nowadays, it has evolved and is able to handle today’s disputes in international commercial law. One example of the Lex Mercatoria is the ‘UNIDROIT Principles of International Commercial Contract’. However, no one really chooses the Lex Mercatoria as the applicable law, probably, because it is too vague and uncertain and as a result the territorial approach prevails. Mustill and Boyd [35] , as a matter of fact, ‘doubt whether a Lex Mercatoria exists in the sense of an International Commercial Law divorced from any State law, or at least that it exists in any sense useful for the solving of commercial disputes’. Thus, every country using the Model Law, will add certain provisions to it that will suit the country’s requirements. Belgium, for example, added in 1985 a provision to the Belgian Code Judiciaire making it more delocalised, but that action had a negative effect on the parties, since they stopped choosing Belgium as the seat of the arbitration and the law changed once again [36] .

Conclusion

To conclude with, in the absence of express or implied choice of the law of the contract by the parties, the arbitrators have to determine the proper law of the contract. That choice could be a lex fori, a conflict of law rules that are based on the seat of the arbitration or on the law of the country most closely connected to the parties. Or the choice of the proper law could be based on an international convention and rules of arbitration thus use a more delocalized approach. Anyway, there is no answer on which choice is the right one.

Every choice has its advantages and disadvantages, as mentioned above, but the important thing is that the arbitrators keep in mind what the parties would want the proper law to be if they were to make that choice after all.